Stockton, AB 506, and the State Controller

Stockton, one of just two cities to ever enter AB 506 proceedings, is welcoming another player to their experiment in averting bankruptcy. State Controller John Chiang announced he has directed his auditors to look into city finances.

The audit could serve as a wrinkle for the Central Valley city that had been hoping the AB 506 process could help it restructure its debts, and address structural failures of its revenue and expense structure. However, AB 506 allows for 60 to 90 days for negotiations, a deadline that Chiang said the auditors will likely not meet.

“Because my auditors are completing their work on other audits and will not be available until early May, it is unlikely that my office will complete its audit of Stockton before the 60 to 90 day process afforded by AB 506 runs its course,” wrote Chiang in a letter addressed to Stockton City Manager Bob Deis.

The audit will focus on Transaction Reports for the City of Stockton and the Stockton Community Redevelopment Agency, and the City of Stockton’s Annual Street Report.

“I have concluded that there is reason to believe that the City’s ability to provide reliable and accurate financial information… is questionable,” wrote Chiang.

That conclusion was based upon discrepancies between information supplied by the City of Stockton and the Independent Audit Reports. Specifically, Chiang points to a year-over-year increase of deficits between FY08-09 and FY09-10. In 2008, no deficit was reported, in 2009, a $37 million deficit was reported.

The city was unable to comment on the Controller’s letter, as they only received a copy of the letter after the media began contacting them for responses.

However, the letter also revealed two other pieces of news with financial implications. Firstly, the Controller’s Office has withheld the city’s street maintenance funds for the month of February – worth about $653,000 – and will continue to do so until the city comes into compliance. Secondly, the city will be responsible for the costs of part the state’s audit. The state will pay to audit the RDA.

Mammoth Lakes, which is also undergoing AB 506 proceedings, has not been target for an audit.